Bargaining for Fiscal Space: Mobilizing Domestic Resources for Social Development

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Bargaining for Fiscal Space Mobilizing Domestic
Resources for Social Development

• Sarah Cook
• Director, UNRISD
• Policy Space Through Domestic Resource
  Mobilisation
• Side Event Commission for Social Development
• New York, 11 February 2013

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The Challenge

• to build social policies on financial
  arrangements that are sustainable in fiscal and
  political terms, equitable progressive, and
  conducive to economic development

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The Context Globalization

• Globalization has put pressure on states
  capacity to raise revenues
• Liberalization of markets
• Income and asset concentration
• Labour market problems
• External debt and global imbalances
• Global economic and financial crisis
• Aid flows / commitments?

• Demand for social policy has increased
• Volatility of market processes, economic and
  financial crises
• Unemployment, informality, poverty (working poor)
• Demographic change
• HIV/AIDS pandemic and natural disasters
• MDGs and national development strategies

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The crisis and finance for social development

• Foreign capital/aid and domestic credit
• Financing costs (internal/external)?
• Trade and FDI
• tax revenues?
• Commodity prices and Terms of Trade
• tax revenues?
• Remittances? Household income ?
• Social expenditures ?, subsidies ?
• Refocus on importance of domestic resource
  mobilization (Monterrey Consensus etc.)

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Fiscal Space

• Budgetary room to finance public policies in a
  sustainable way (honour debt obligations,
  maintain solvency .. )
• Expanding fiscal space
• Reallocation of existing revenues/efficiency
  gains
• Mobilization of additional revenues
• Estimating fiscal space
• Compare actual expenditure with benchmarks
• Compare actual expenditure with costs of basic
  package (SPF)
• Assess space to increase tax revenues or public
  borrowing (Oxfam Report, IMF)

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Is Social Policy affordable?

• Social policy is an investment in peoples
  well-being and in development (productivity,
  social cohesion)
• Type of interventions and programmes as well as
  costs depend on policy legacies and structural
  factors, political priorities, and contemporary
  needs
• Basic social protection packages are affordable,
  even in low-income countries (ILO/SPF costing
  studies, DESA simulation on MDG financing for LA,
  Unicef/Helpage costing tools etc.)
• The costs of inadequate financing of social
  policy are high

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Social Expenditure is a Policy Variable

• Government expenditure on social protection
  (social insurance, social assistance) in three
  middle income countries in LA
• (Barrientos, 2010)

Country In of GDP
Argentina (2004) 9.2
Brazil (2004) 13.2
Mexico (2002) 3.5
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Mobilizing Revenues

• Tax reform
• Extension of contributory systems (social
  insurance)
• Capture of mineral rents
• Trade, tariffs
• Foreign aid
• Domestic and external borrowing, FDI
• Public-private partnerships
• Private funds (HH income/savings, remittances)

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Tax Revenue as of GDP by country group

• The aggregate view tax shares as of GDP rise
  with income level
• Source Bird and Zolt (2005).

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Tax Reform

• Tax reform remains a key challenge for developing
  countries.
• Taxation
• Is superior to other revenues in terms of
  distributional justice and to reach universal
  coverage
• Direct taxes have greater potential in terms of
  progressivity / redistribution / solidarity
• indirect taxes (VAT) design matters for
  redistribution
• trade - tariffs ?
• Can enhance strong state-society relations and
  state accountability (all contribute, all
  benefit)
• Is more sustainable than external revenues

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Revenue type, distribution and social relations

• Regressivity
  Solidarity
• Time-burden tax (self-provision)
• User fees (most regressive, least solidaristic)
• Pre-paid schemes
• Generalized insurance
• Indirect taxes
• Earmarked taxes
• Direct taxes (most progressive, most
  solidaristic)
• Source Delamonica and Mehrotra 2009.

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Political-economy of taxation

• More convincing to argue for progressive direct
  taxation if public/social expenditures benefit
  all (universalism)
• To overcome obstacles towards direct taxation,
  find functional equivalents
• Marketing boards
• Land/export taxation etc.
• Key questions
• What are the political conditions for progressive
  tax reforms?
• Who are the actors involved in bargaining and
  negotiation processes?
• What are the linkages with social development
  policies?

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Mineral rents and financing social policy

• Can mineral rents ease the financing constraint?
• Challenges
• Dutch disease effects and volatility
• State capacity and democratic governance
• Build a social consensus on the use of funds
• Norway Government Pension Fund Global
• Bolivia Renta Dignidad financed through Direct
  Hydrocarbons Tax (32 production tax 2005)
• Chile Extension of Social Pension Coverage
  (2008)

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Share of government revenues in oil rent (in of
total, UNCTAD TDR 2010)
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Share of government revenues in copper rent (in
of total, UNCTAD TDR 2010)
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Mineral wealth Blessing or Curse?

• Resource curse thesis ? empirical works by
  Richard Auty and by Sachs and Warner (1995)
  followed by many others dominates global
  debates on natural resource-led development
• Negative relationship between natural resource
  abundance and growth performance
• causal relationship exists that explains this
  negative link
• Main criticism
• methodological issues
• deterministic conclusions
• pessimistic prospects
• ?Interesting question is to identify specific
  challenges of mineral-led development and how to
  overcome these

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The challenges of mineral-led development I

• Economic challenges Dutch disease, price and
  revenue volatility, terms of trade, enclave
  nature of mineral production, limited employment
  creation, limited incentives for skills
  investment and education
• Political challenges who captures rents (foreign
  investors, private investors, state, elites)? How
  are mineral rents invested, revenues spent?
  Rent-seeking and corruption? Distributional
  conflicts? Access to rents finances violent
  conflict or undemocratic regimes?

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The challenges of mineral-led development II

• Social challenges inequalities (income,
  regional, gender, ethnic/indigenous peoples
  rights), potential fragmentation of social
  systems
• Environmental challenges ecological costs
  associated with EI depletion pollution and
  destruction of environment climate change

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Natural resource based sectors drive growth

• Global demand/prices ? (India, China)
• Incentives for investments ? (portfolio and FDI)
• New technologies (exploration, extraction)
• Path dependency of growth models based on natural
  resources
• Impact of neoliberal policies and globalization
  on domestic production (manufacturing)
  reorientation towards comparative advantages
  reprimarización

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Successful mineral-led development also requires

• Policies that foster diversification while
  safeguarding stability
• State capacity and institutions that are adapted
  to national contexts
• Consensus building on redistribution of rents and
  compensation of producing regions
• Sector strategies that minimize environmental and
  social costs
• Regulation and monitoring of foreign investors
  and global commodity (and related financial)
  markets reduced trade barriers for more
  processed goods policy space (capital controls,
  industrial policies etc.)
• Mobilization of domestic resources such as
  taxation and social insurance contributions

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Interesting lessons from case studies

• Country context more important than resource
  abundance
• Mineral-led development has specific challenges
  that need to be addressed
• Balancing of economic and social goals and
  democratic politics lead to more sustainable and
  equitable outcomes

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New ProjectThe Politics of Domestic Resource
Mobilization for Social Development

• The project seeks to inform global debates on the
  political and institutional contexts that enable
  poor countries to mobilize domestic resources for
  social development
• How to bridge funding gaps (MDGs, social
  protection floors)
• How to enhance national ownership and policy
  space
• Understand politics of revenue and social
  expenditure bargains
• Connect literatures on politics of resource
  mobilization with politics of social provision

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Resource Bargains

• Close relation between revenues and expenditures
  limits to debt financing
• LICs dependence on IFIs and donors
• resource mobilization as technical issue (ideal
  tax system, neutrality, reduced redistribution
  through tax system)
• Less responsibility for recipient countries to
  strike bargains with their citizens, bargains
  between governments and donors
• Social protection (policy) literature focuses on
  expenditure/demand side (issues of retrenchment,
  privatization, coverage extension)
• Resource bargains more negotiation, less
  coercion can be informal, implicit, indirect, or
  direct between state and citizens, state and
  enterprises/investors etc.

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Research Themes

• Contestation, bargaining and outcomes
• Conflicts over resources to be mobilized, who
  pays, design of policies etc.
• Nature of revenue bargains, link to social
  provision
• Changes in key relationships
• State-citizens
• Donor-recipient
• Institutional development
• E.g. institutions in financial sector, tax
  offices, central banks, independent revenue
  authorities, social service delivery
• What reforms? Are there spill-over effects of
  institutional development? New modes of
  engagement with citizens?

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A strategic approach towards the financing of
social policy requires

• Reliable calculations on estimated costs of
  planned programmes over longer periods and taking
  into account different scenarios (ILO, Helpage)
• Evaluation of different funding sources and
  financing techniques and their pros and cons from
  a political, economic and social point of view
• Analysis of relevant experiences in other
  countries
• Early dialogue with relevant stakeholders,
  including Social and Finance Ministries, external
  donors, international organizations, social
  partners, civil society organizations etc.
• Contingency plan for crisis situation

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Conclusions

• Financing mix is country specific, what is a
  (national, global) political priority is
  affordable
• Anchor a countrys social policy system with
  domestic sources of finance (synergies between
  economic and social development)
• External resources (mineral rents, aid,
  remittances) have the potential to complement
  these, especially in LICs
• Successful transformation of resources into
  outcomes depends on design of social programmes
  (e.g. universalisms vs. targeting), broader
  strategy, politics and governance
• Avoid reforms that trigger long term costs for
  social development
• Fiscal constraints are no excuse to violate
  social rights!

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Mineral rents and the financing of social policy